Political and Economic Update
We begin by laying out the evidence about the fairness of the referendum voting. From a legal viewpoint, the High Election Council ruling to count the unstamped ballot slips weakened voter security and made it difficult to detect fraud. On the other hand, there is not enough evidence that the HEC acted in bad faith. There is substantial evidence of voter fraud and intimidation, which may have swayed up to half a million votes, not enough to alter the result. Nevertheless, the weight of the evidence favors a rigged election and calls for a repeat.
But it won’t happen, neither will street demonstrations last, but democracy is vibrant and can avenge the loss in 2019. AKP has begun soul-searching about the erosion of support in high-income cities and among middle-and high income voters. It is too early to decide whether the intra-party debate will lead to moderate domestic policies. A cabinet reshuffle seems in the works, which will signal whether President Erdogan is on board with domestic policy overhaul. We also review post-referendum statements regarding key policy areas.
We see upside in Turko-American relations, counterbalanced with alarming developments at the EU front. Policy visibility remains low, while there is not enough evidence that political risk will decline visibly in the near future.
The 12-month rolling current account deficit rose in February, but the core deficit narrowed, as much of the widening in the overall deficit had to do with the deterioration in gold balance. Financing also improved, with the deficit finally being fully financed by portfolio and bank flows, but the trend or structural weakness in Turkey’s BOP accounts – that of a relatively large current account deficit under-financed by capital inflows -- continues.
The budget deteriorated sharply in March, which was one of the worst performances on record. The authorities may get away with an overall deficit of around 2.5% of GDP this year, but fiscal risks are building up at an alarming rate and reversing course looks more challenging than ever.
The unemployment rate declined slightly in January, probably thanks to government incentives and a sudden jump in agricultural employment. Unless the economy picks up visibly, further deterioration later in the year may be inevitable, however.
The key attractions of the upcoming week are the MPC meeting on Wednesday and Inflation Report presentation on Friday. While we expect the yearend estimate of 8% to be revised up on Friday, we give a 50% chance to the Monetary Policy Committee raising the Late Liquidity Window rate by another 25-50 bps, and about an equal odd to staying put.
A key data release of the week is March trade deficit, which should come in at around $4.5 billion, based on preliminary customs data, taking the 12-month rolling deficit down to around $56.5 billion, from $57 billion in February.
Cosmo doesn’t subscribe to the view that the worst is over for Turkey, or TL denominated assets are cheap.It is “show me” time for Erdogan, and smart money ought to bet on disappointment.
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